France's Danone Buoyed by Chinese Demand for Baby Formula
French food group Danone achieved better than expected first-quarter sales growth of nearly 5 percent, helped by Chinese demand for its baby formula products, cementing guidance for higher profit and sales this year and beyond.
Along with consumer goods rivals such as Nestle and Unilever, Danone has come under investor pressure to improve results and it needs to deliver on 2020 profit margin and sales growth targets set last year.
Wednesday's numbers lifted Danone's share price 2.5 percent by 1028 GMT, making it the biggest gainer on France's benchmark CAC-40 index.
The world’s largest yoghurt maker, with brands including Actimel and Activia, also flagged improving dairy sales in Europe and noted signs of growth in North America, where Danone is integrating U.S. organic food group WhiteWave.
Danone reported first-quarter underlying sales up 4.9 percent to 6.085 billion euros ($7.53 billion), its biggest percentage rise since the fourth quarter of 2014. It also beat a company-compiled median forecast from 22 analyst estimates of 3.9 percent like-for-like sales growth.
“We are reaffirming our confidence in the agility of our model to navigate a volatile environment to deliver our 2018 guidance and to accelerate towards our 2020 ambition,” Chief Executive Emmanuel Faber said in a statement.
Danone, which is targeting an operating margin above 16 percent and like-for-like sales growth of 4-5 percent by 2020, reiterated its expectation of a double-digit rise in 2018 underlying earnings per share (EPS) excluding the impact of the sale of a stake in Japan’s Yakult.
China Upturn
“While FY 2018 guidance is unchanged at this stage, we expect FY 2018 EPS consensus to rise by around 2-3 pct as exceptional growth in premium infant milk formula channels in China proceeds unabated,” said Investec Securities analysts.
In recent years Danone’s growth has been slower than that of its rivals, largely because of weakness in its European dairy business, while regulatory issues have weighed on its baby food and waters operations in China.
The picture in China has begun to change, however. There has been strong demand for baby formula products thanks to a sharp rise in birth rates tied to the end of the one-child policy, growth of urbanization and affluent middle class.
Danone benefited from continued strong Chinese demand for its high-end baby formulas, such as Aptamil and Nutrilon, and its strategy of developing direct distribution in the country.
Finance chief Cecile Cabanis said Danone expects that trend to continue in the second quarter but cautioned that a “normalization” of Chinese demand is expected in the second half of the year.
Danone shares, which rose 16 percent in 2017, have retreated by about 4 percent so far this year.
